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Canada dodges hike in food prices

Here's something to chew on over your morning bowl of cereal: Only 2 per cent of the price you paid for that product represents the cost of the grain.

By DANA FLAVELLEBUSINESS REPORTER

Fri., June 13, 2008

Here's something to chew on over your morning bowl of cereal: Only 2 per cent of the price you paid for that product represents the cost of the grain.

The rest goes to pay for things like shipping, processing, packaging and advertising, along with heating and lighting the store where the final product is sold, according to a report by Statistics Canada.

That's one of the reasons food price inflation remains relatively low in Canada, at 1.2 per cent in the 12 months up to the end of April, even as the price of grain soars on world markets, the study concludes.

The more processed the product, the less the actual cost of the food is reflected in its final price on the store shelves.

It's not the only reason Canada has the second-lowest food price inflation in the world, after Japan, said the study, called "Food Prices: A boon for producers, a buffer for consumers."

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Americans also consume a lot of processed food, where the price of the grain represents a small share of the final product cost. Yet, food price inflation south of the border is up 5.9 per cent in the past 12 months.

That's because Canadian consumers have a couple of other things going for them at the moment.

A rising dollar has made imports like fruits and vegetables cheaper, offsetting higher prices for staples like bread and pasta.

And the recent entry of Wal-Mart Canada Corp. into the fresh-food market has sparked a price war among Canadian food retailers, pushing prices on store shelves below cost in some instances.

In fact, for Canada, if you had to have price shocks in agriculture, there's no better place than grain, a crop that grows well in colder climates, said Philip Cross, a co-author of the StatsCan report.

While consumers are relatively insulated from the impact at the checkout counter, Canada's farmers are set to reap a huge windfall, Cross said.

"On the one hand, our consumption of grain is relatively low. Canadians are least dependent on bread and cereal for our basic foods," Cross said. "On the other hand, our producers stand to make a killing on this."

Canada's exports of food and agricultural products hit a record $34.6 billion last year, while farm cash receipts rose to a record $40.5 billion, the StatsCan report noted.

Canada's farmers acknowledge the global boom is benefitting their bottom line, after years of negative profit margins.

"We're certainly seeing the benefits of the increase in commodity prices," said Bob Friesen, president of the Canadian Federation of Agriculture.

But he said farmers are also paying higher prices for fertilizer; fuel to run the tractors and other inputs. As well, they have had to plant larger crops this year to spread out the cost, so their risk is higher if the crop fails, Friesen said.

While food-price inflation in Canada is low, grain-based products, such as bread and pasta, are up 10 per cent compared with last year.

"The farmer gets such a small share of the market dollar," said Friesen."The increase in commodity prices should not result in a big increase at retail."

If the price of a bushel of wheat climbs $1, the impact on the retail price of bread should be just 2 cents, if nothing else changed, according to the federation.

Both of Canada's biggest bread bakers, Canada Bread and Weston Bakeries, say they've had to raise their prices several times in the past year to reflect soaring grain, fuel and other costs.

The Bakers' Association of Canada defends the increases, saying its members are indeed facing huge cost pressures.

"We've seen three-digit increases in the price of various agricultural commodities," said association president Paul Hetherington. Hetherington acknowledged wheat is just one component of the bakers' costs, though he disputed the farmers' figures, saying they appear to be too low.

On the other hand, he pointed out bread makers buy flour, not wheat, so their cost includes shipping the wheat from Thunder Bay to have it milled into flour, then baking it in gas-fired ovens, packaging and shipping it to stores.

"I am quite frankly expecting to see significant inflation pressures on food in the near future," Hetherington said.

"If you look at what's happening in the U.S., where it's 4 to 6 per cent. We've been protected by the higher dollar and a highly competitive retail marketplace. But that's not going to last forever."

According to Statistics Canada grain price increases have a relatively small impact on food-price inflation in Canada. In any case, consumers have so many food choices they can easily switch to lower- priced products, the agency noted.

"Canada overall stands to gain from the agricultural price shock," the study concludes, as food price increases remain relatively moderate and the "boom on the farm" indirectly benefits a wide range of suppliers, from machinery to transportation, financial and business services.

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